Shaw and Partners CIO Martin Crabb discusses where markets are headed in 2018, sectors to watch and what to potentially avoid.
Jessica Amir: Hi, I'm Jessica Amir for the Finance News Network. Today I'm joined by the Chief Investment officer of Shaw and Partners, Martin Crabb, to talk about the outlook for the ASX and Wall Street. Hi Martin, welcome.
Martin Crabb: Hi Jessica.
Jessica Amir: So first of, we've seen volatility really return to Wall Street, really on the back of better than expected jobs and economic growth data that's come out of late, and that's really caused the Treasury Yield to pop. What does this all mean and what does it mean for local investors, and when can we expect volatility to ease?
Martin Crabb: So obviously in February this year, we've had big sell-off in the US market and the Aussie market, and we've had a volatility spike. So volatility has been very low for a long period of time as people have been selling it to make money. So I think the markets will risk mis-pricing risk and the bond markets will probably misprice the inflation. So the 10 year Treasury has gone from 2 per cent back in September, to 2.4 per cent at Christmas, now up to almost 2.9 per cent, so that's obviously caused the equity market to suffer a bit. But against that backdrop we've had much stronger earnings growth and economic stimulus in tax cuts so, all of those things have sort of moved the markets back to almost where they were.
So we will see volatility rear its ugly head again this year, but at the moment those sort of markets are quite sanguine in the outlook for growth and so forth.
Jessica Amir: So can you give us any gage on where you think the Dow Jones will be? When do you think it will hit 26,000?
Martin Crabb: Obviously the Dow Jones, it's on a bit of a tear, bottomed at 6,500 almost nine years ago now. So we're almost nine years into a bull market, which is long by historical standards. But there's such strong earnings growth Jessica, and earnings growth has been upgraded as well, so as the tax cuts are being factored into earnings, that tide's gonna keep rising for the majority of this year. So as long as earnings are going up and bond rates aren't selling off too much, we think the Dow can hit a bit higher. Not quite sure where that goes, obviously it got probably 1,000 points higher than he was where it was before, so I'd expect it to retest that high and maybe even go a little bit higher later this year.
Jessica Amir: And what does it mean for the ASX200 and local investors?
Martin Crabb: Yeah, we're being dragged higher if you like so round about a third of the companies in the ASX have some sort of offshore earnings, and quite a few companies are global by nature. If you think about mining and pharmaceuticals and those sorts of industries, so they are global companies and they are benefiting from the same growth the US companies are. So we will get dragged higher by the Dow, that's pretty clear. I think if the Dow doesn't run into a bit of trouble, obviously the Aussie market's going to follow that as well.
Jessica Amir: Can you pinpoint where the ASX200 will be, say by the end of this year?
Martin Crabb: I'd like to be able to, that would be good wouldn't it? I was asked this at the end of last year, where I think the market would end the year, and I felt it would probably end round about where it started. But it would probably peak somewhere in the middle of the year. And so I this sort of 6,000 is kind of where I think it will be at Christmas time. But in the middle of the year, I'd expect it to be a couple hundred points higher than that, because I think it's a first half, second half sort of year.
Jessica Amir: Martin now for the sectors that we can lookout for this year. Last year it was tech stocks in the US, and also for the ASX it was the lithium players and medicinal marijuana players. What can investors really eye and sink their teeth into this year?
Martin Crabb: I think there's a lot of benefits in investing from a sector basis, from a top down basis. So, if you think just broadly what industries are doing well. We know that the Chinese consumer is an emerging theme, there's 350,000,000 middle class Chinese people who are coming into money if you like. And so they are tending to upgrade their consumption, so things like Australian wine, Australian beef and milk powder products and those things. So, those companies that are selling into that market, the Bellamy's (ASX:BAL), a2 milk (ASX:A2M), Treasury Wine Estates (ASX:TWE), those companies are going very, very well, and it's difficult to see that slowing down.
China's middle class also starting to travel more, so there's four billion trips taken in China last year, only 100 million of them were outside of China, and about 1 million were Australia. So we're about 1 per cent of that market, but that market's growing at 20 per annum. So, it's difficult to find too many companies that are exposed to travel, but obviously airlines, airports, travel agents and also people who own tourism assets. So a company like SeaLink for example, which owns the Captain Cook cruises here in Sydney is one that's going to be a beneficiary. So I think if you play to those areas you think are going to do well out of China, you do well.
The other area is obviously commodities, so if we do have a breakout of inflation, which is what everyone's kind of feared about at the moment, we will see commodity prices continue to do well. So, pretty much everything in the mining sector and the energy sector will do well in a rising inflation environment. So I think if investors aim at those two themes, they'll do quite well this year.
Jessica Amir: And just honing in on mining if we may? What key sectors really in that mining space can we eye?
Martin Crabb: I think iron or in coal had been surprisingly strong, most people have factored in a slowdown in China, which doesn't seem to happen, so the iron ore names are still pretty attractive to us. But we're probably more interested in a broader commodity, such as copper or nickel, where there's more... Not just relying on China's steel industry. For that it just, it's basically global growth, so we like Oz Minerals (ASX:OZL) in the copper space, we like Western Areas (ASX:WSA) in the nickel space. And even stocks like Iluka (ASX:ILU) in the mineral sand space is going to do quite well this year as well. So there's a whole bunch of stocks there for investors to choose from.
Jessica Amir: And Martin, perhaps your final tips for investors for 2018?
Martin Crabb: I think it's going to be a game of two halves in 2018. I think the first half of the year looks really interesting and money is going to be made. I think the second half of the year gets a lot tougher, as interest rate hikes by Central Bank starts to bite. So I think the most important thing for investors this year Jessica, is diversification. Is to have a broad range of assets that you own. Whether that's cross property and bonds and shares, but also around the world, not just to have all of your money in Australia. Because I think there are industries around the world, which we can't get access to here. And I think investors should really look to invest offshore, with a broad range of asset classes and really get diversified for the year.
Jessica Amir: Martin Crabb, thank you so much.
Martin Crabb: Thanks Jessica.